Exchange Rates and International Trade

Exchange Rates and International Trade

• Exchange rates between the Japanese yen and the US dollar shifted from $0.014 to $0.011, indicating an appreciation of the dollar against the yen.
• Improvements in Mexican production technology, resulting in superior guitars, increased demand for pesos, causing the peso to appreciate.
• Political instability concerns surrounding Mexican elections decreased demand for pesos, leading to depreciation. Investors unloading pesos increased the supply, further contributing to the depreciation.
• The cost of a baseball bat is $49. The exchange rate is $1.43 = £1.00. To purchase 12,000 bats, the London government needs £411,189. The calculation assumes the local government wants the bats. The local government's needs are defined in the local currency.
• A higher demand for a currency will cause that currency to appreciate. A higher supply of a currency will cause that currency to depreciate.
• The end goal of economic activity is consumption. This is not considered greedy. The goal is to consume better goods and services such as education, and health.

Comparative Advantage

• Countries have varying levels of production capability. This can be compared in terms of production outcomes.
• One country may have a comparative advantage over another in producing a specific good or service because of lower opportunity costs or efficiency.
• International trade occurs when countries exchange goods or services based on comparative advantage. Determining which country, in relation to another, has the best outcome.
• Examples include Costa Rica in bananas, and the U.S. in corn, these are examples where the countries have comparative advantages.
• A country can have an absolute advantage if it can produce a product using fewer resources than other countries. This is distinct yet conceptually related to the concept of comparative advantage.

International Trade - Comments

• Free trade proponents dislike competition, this does not mean it's unethical or immoral, but often self-interest.
• Competition leads to better products, ideas, and service developments.
• The topic of national defense and self-sufficiency remains relevant as well, making economic policy a complicated area.

More from Adam Smith

• "Individual ambition serves the common good."
• "Every man lives by exchanging."
• "Man is an animal that makes bargains; no other animal does this—no dog exchanges bones with another."